Silly Little Country

The Harmonized Sales Tax

The NY Times Economics blogs post very intelligently on the debate over harmonizing our consumption taxes, and larger general issues.
The much-despised Brian Mulroney is one of the few Canadian Prime Ministers of my lifetime I consider to have done anything useful policy-wise. He drove two great policies - NAFTA and the GST. Both were presented by opposition groups as unacceptable, and neither was ever rolled back when that same opposition took power. (As a side point, Pierre Elliott Trudeau introduced and withdrew numerous policy initiatives and his successors had to take apart many of his stupid ideas, not nearly enough of them, though.)
The NY Times blogger, Ian Austen, makes one very good point that seemed not to have been noticed back at the time Mulroney introduced the GST:

While most Canadians were not aware of it, the Goods and Services Tax replaced another federal tax: the 13.5 percent Manufacturers’ Sales Tax, which was charged on the wholesale level on goods and excluded the service sector of the economy. (The G.S.T. also replaced an 11 percent telecommunications tax.)

This allowed the opposition much rhetorical nonsense.
It is an important fact that the GST is a VAT.
There has long been pressure to bring the federal and provincial taxes together.

Then what explains the current outcries in British Columbia and Ontario?
Businesses have long pushed the provinces to incorporate their sales taxes with the G.S.T., thereby creating what the federal government calls a “Harmonized Sales Tax.” Not only does the step reduce paperwork, the single tax also allows businesses to recover provincial sales taxes on inputs as they now do with the G.S.T.
But with the exception of Quebec, most large provinces had been reluctant to take that advice until now.
That’s mostly because it’s not an easy sell to voters. To increase its efficiency, the G.S.T. taxes far more products than provincial sales taxes and it also include services, an area largely untouched by current provincial sales taxes. Because of that expanded base, a report prepared for the Ontario Chamber of Commerce estimates that combining the two taxes boosts inflation by about 0.01 percent to 0.02 percent a year. The Toronto-Dominion Bank, however, estimates there will be an initial 0.7 percent rise in prices after the two provinces merge with the federal system and a 0.4 percent increase over the long term.
But both the bank and the chamber of commerce agree that the impact on consumers will fall over time as companies pass along the savings they gain from recovering provincial sales taxes.

The main hits from the HST would not be hits on me; I do not plan to sell my house, ever, for example. It would be a major hit to a lot of people.
It makes the taxes political dynamite, as pointed out, and McGuinty, Ontario's premier, will be especially vulnerable as one who so visibly joined the "Read My Lips" school of political campaigning and promising not to raise taxes, who of course do it first thing on being elected.

But the controversy generated by merely modifying Canada’s existing federal sales taxes will likely give pause to anyone in Washington considering the merits of launching such a scheme from scratch.

posted by Alan Adamson @ 11:33 PM